Transition management costs force creative approach

One of the hidden impacts of the liquidity crisis has been the vastly increased costs entailed in major institutions such as pension and superannuation funds changing their asset allocations, according to the chief executive of transition management specialist BNY Mellon Beta Management, Mark Keleher.

According to Keleher, the escalation in costs associated with changing asset allocations has required companies such as his to resort to new methodologies including the use of futures, swaps and peer support agreements.

“These are very, very interesting times to be a transition manager,” Keleher said. “With increasing volatility and increasing transition costs, the asset management business stopped [but] despite that we’re busier than we’ve ever been.”

He said this was because “almost everyone does not have the asset allocation they would like”.

Keleher said this was particularly the case with fixed interest investment, although Australian superannuation funds were less affected than their peers, largely because of the cash flows generated by the superannuation guarantee.

“In transition management we’re seeing a number of liquidations in fixed interest portfolios, where we’re seeing as much as a third of the portfolio being unsaleable — unsaleable meaning they’re trading as much as 20 per cent below the custodial price or where there’s no bid in the marketplace,” he said. “Clients are in a real dilemma if they do not have the right asset allocation — the only thing we’ve been able to do is sell equity and what we’ve seen in recent months is forced equity liquidations.”

Keleher said it was in circumstances where reallocating could cost up to 40 basis points when it normally cost just two basis points that it had been decided to look at alternatives and that had led to the use of futures or swaps supported by peer support agreements.

He said such arrangements were capable of reducing the highly expensive 40-basis point scenario to just four or five basis points.